Private lender Federal Bank has been growing at more than 20% in the last few quarters. Shyam Srinivasan, MD and CEO, said he believed reforms in the last 4-5 years are expected to bear fruit in 2018 and growth momentum will pick up with capital infusion in public sector banks and budgetary proposals in the upcoming Budget.
What is the outlook for banking in 2018?
There is positivity in many areas. Bigger geographies have registered growth. Every trading day, the indices register a new high. These are indicators that systemically things are looking more conducive for growth. However, higher oil prices are having a bearing on India.
But structural reforms over the last 4-5 years in India have matured enough for action to commence, combined with capital coming into the banking system and reasonably elaborate resolution on bank credit, which would provide more risk appetite for larger public sector banks. In the last 4-5 years, large private sector banks like us has become really formidable. On balance, the outlook for 2018 looks a lot more encouraging. Everything depends on the capital that comes in and the tone of the Budget. Bias seems to be focused around growth.
For a bank like Federal, when oil prices are good, it is good for banking. The stability in the West Asia market is increasing, which means remittances to India are increasing. When remittances rise, Federal Bank benefits.
Can you elaborate on the rise in remittances?
If you see the remittances, we have 15% of India’s remittances; four years ago, we were at 7%. So we have more than doubled our share of remittances. Even if the remittance number were flat, we are gaining overall share. 92% of our book is retail deposits. In December, we crossed ₹100,000 crore in deposits. We are almost 1% of India’s deposits (market share); 40% of it is from residents and non-resident deposits are grown and in three years it doubled. Its growing at 20-22 per cent. Institutionally, we feel that we are equipped to face challenges.
We are one of the top five banks [in terms of the least] NPAs. There are very few banks with better credit-deposit ratio than us. If we take the last 8-10 quarters, each quarter we have grown more than 20% and the quality of credit is good.
How has the merger of SBT with its parent SBI helped your bank?
Certainly we got a good share. We want to dominate Kerala. In this geography, we have 14-15% share of the market. Earlier it was SBT, SBI, Federal and others. Now its has become SBI and Federal. SBI is still a giant, can’t ignore that. However, this merger benefited us. Any integration of any two institutions is a distraction for them. We are well capitalised with good credit appetite. We are an organisation willing to get business. So we are able to get a good share in this market.
Your bank is an important private sector bank in the country and many are eyeing for it. What is your opinion?
We are big enough to be a standalone bank. Very soon we will be ₹200,000 crore [in total business]. We want to grow organically. Any healthy merger is welcome when both sides are willing and wanting. Otherwise it is antagonistic. We don’t want to do anything hostile also. I want to look at the organic opportunity. If we get a chance [to acquire] we will not say no. But we don’t have enough opportunities. We are open to explore any opportunity. We are looking, but [don’t see] any major opportunity. It should be meaningful and add value to us.I would focus on strengthening our currency. When my currency is strong we can make a stronger purchase.
But on several occasions, RBI has forced banks to take over other banks?
That they will do when they find some inherent weakness in those banks. We are not in that league. Now we have 1,252 branches. At that time (2006), when we acquired Ganesh Bank of Kurundwad Ltd. [on RBI’s initiative], they had around 33 branches with presence in interior Maharashtra. We integrated them into our system. They were [too] small to make any impact. We are now growing at 20-25%. Why can’t we grow at 30%? Once we demonstrate that, investors will trust us and capital will be available. We are well capitalised. In last June, our QIP issue of ₹2,500 crore was subscribed within three hours. Our job is to ensure the faith [of investors] is not misplaced.
There is a proposal to reverse some of the Insolvency and Bankruptcy Code (IBC), like allowing failed promoters to participate in the resolution process. What is your suggestion?
I feel if somebody has run the company in a manner in which it could not service its debt then for them to re-participate in the resolution process is not ethically correct. You clear the dues and run the company back. I think, I have an ideological difference. Even today the company have the right to pay the dues and take back the company. If you are not able to service your dues, whatever may the industry conditions, [as a lender] I cannot give a massive discount.
Which are the major NPA accounts of your bank?
Thankfully, we don’t have any big names in stressed assets. I don’t have any residual major cases.
From the second half of 2018, some recovery will come in. My view is that by March 2019, we will see some of these extremely large stressful cases find meaningful solutions. But public sector banks were facing disproportionate challenges in the last few months.
Now [with IBC], people think twice or thrice before making any significant default and the chance of default would come down from the scale at which it was happening. Towards the second half of this year, recovery momentum will gather.
Are bank mergers likely to solve the NPA problem?
To my mind, NPA and resolution is one and merger is another. One is not a solution for the other. Conceptually ‘big’ is good and, conceptually again, ‘strong’ is good. With size, you get scale, the ability to manage the right kind of talent, better utilisation of capital...
Banking in India is a capital-hungry business. Here capital is not cheap and there is a need for judicial use of capital. Today investors are looking at 15-18% return on equity. But some larger public sector banks are yielding less than 10%.
What are the growth prospects of your bank? What is the roadmap?
We have emerged as a meaningful player in major markets in India across business segments. We have a diversified portfolio of retail and corporate which are gaining share. We are positioned for good growth in geographies where we participate. We will double our share outside the home market. In the next 3-5 years, we can record good growth and want to deliver on capital. Digital is a big opportunity because digital is not any one person’s preserve. We have good capital, good distribution and a good team; with reasonable grit, we can go ahead. In the last 8-10 quarters we have grown more than 20%. That will strengthen our franchise. In remittances, SBI is the number one player in the country, but in the rate of incremental inflow, we are a formidable player. Particularly, as the economy is turning positive, we can grow faster.
Interest rate and inflation outlook for 2018?
Interest rates may not go up too much nor will they trend down. The government and RBI agree they don’t want high inflationary environment. Rate cut will not be there in the foreseeable future. I think it is flattish for calender 2018.
In the FRDI Bill, do we need to raise deposit insurance?
It’s an overreaction to an imaginary problem. Finance Minister has clarified that several times. Putting an inconvenience to the depositor will not happen. There is a debate on whether equityholder or the depositor should take the hit [if a bank fails]. But the Ministry had already clarified that. Deposit insurance is a commercial decision. If insurance goes up, somebody has to pay the premium. Once it goes up, the impact will only come back to the customer.
What suggestions do you have for the Budget?
The government is likely to strengthen the architecture of the resolution mechanism [of NPAs] so that clearances happen faster. In 2018-19, strong recovery may happen. With availability of good capital in abundance, banks can lend; that can stimulate the economy.
For a bank to generate money, it needs good growth and strong recovery. The Budget is likely to stimulate the economy by activating rural economy and agriculture. We are still an agrarian economy. Opportunities are plenty but are not fully leveraged to create one crore jobs in a year.
